Foreclosure Debt Can Stay With You the Rest Of Your Life, Thanks to Big Banks

Now that all the political focus is on sequestration, a large contributor to our economic crisis has become largely unnoticed. The foreclosure crisis has barely even been a sidebar since before the 2012 campaign season began. While foreclosure filings are down to their lowest levels in six years, there remains a significant problem involving homes currently in the process. The latest trend in the crisis is banks not finishing a foreclosure that has been started, making foreclosure the gift that keeps giving when it comes to finding new ways of depressing the economy. When foreclosures are started but never finished, the impact is felt by both borrowers and communities long after the nightmare of legal action was supposed to have ended. If this trend continues to go unchecked, the impact on consumers and our communities will prevent any real economic recovery from happening.

A 2010 report by the Government Accountability Office indicates that there are about 30,000 of these bank walkaway homes across the country, but the most recent RealtyTrac data indicates that over 1.5 million homes are still in some phase of the foreclosure process. Unfortunately, it is hard to determine what house is a bank walkaway, since the delay in the foreclosure could be from a variety of reasons ... including bankruptcy and banks being slow with the paperwork.

What isn’t hard to determine is the impact these "zombie" houses have on homeowners and the community. Rose Nathan and Mustapha Sesay both took significant personal economic hits after they thought their home had been foreclosed on. Both have seen significant drops in their credit scores, as well as collection efforts on homes they thought were taken from them. Setting the collection debt aside (which does on an impact on disposable income), the impact of the plummeting credit scores means former homeowners trying to find a place to live find it nearly impossible; insurance rates jump, credit card companies cut you off, and bankruptcy seems like the only option. With this happening to potentially tens of thousands of families, economic recovery doesn’t seem possible.

The impact is also being felt by communities. Those communities most often impacted by "zombie" foreclosures are the poor and working class and often full of older housing stock. In these cases, the foreclosure will cost the bank more than they can recoup with a sale - and so the home just sits in limbo. This leads to a rise in boarded up and abandoned properties, as the owners have moved on under the impression that their home was being foreclosed on. The result is a drop in property values and an increase in vagrancy and blight in the community.

NPR’s Marketplace recently highlighted this issue in Durham, North Carolina. The story highlights the efforts ofa community and nonprofit agencies effort to address one of these "zombie" houses. Reinvestment Partners (where I work) worked with the community to raise awareness of Bank of America’s role in contributing to community blight, before the bank finally succumbed to pressure from regulators and the local courts to foreclose on the property, which was purchased at auction by Reinvestment Partners for rehab.

What was supposed to be a solution for this issue was the AG Settlement. However, like most solutions to the crisis over the last four years, enforcement is an issue. The settlement monitor is reliant on information provided by the banks to provide any enforcement. It doesn’t take much thinking to realize that banks aren’t going to intentionally turn over information that can lead to enforcement action. Provisions in the settlement require bank servicers to notify borrowers and tax offices of any decision to delay foreclosure or forgive the lien in lieu of foreclosing. Banks found a workaround: drop significant servicing portfolios on sub-servicers that are not under the settlement.

The tens of thousands of families facing this dilemma and the countless communities being hit by interrupted foreclosures will play a role in whatever economic recovery is supposed to happen. If family debt continues to rise and credit scores continue to plummet after what appeared to be a foreclosure, how can they recover economically? How can communities with a rising number of abandoned homes and dropping property values recover? The increase in community blight and vagrancy are not signs of a community trending up; instead, it's making economic recovery almost impossible. Unless we get real regulation and enforcement, banks will continue to bring communities and families down and preventany real economic recovery from happening.'